India needs western supermarkets

The Indian government should ignore opposition to foreign-owned retail superstores as they will meet rising domestic demand and create jobs

Customers shop at a Best Price modern wholesale store, a joint venture between Wal-Mart and Bharti Enterprises, at Zirakpur. The Indian government has just decided to open its supermarket sector to global retailers. Photograph: Ajay Verma/Reuters

Last Thursday, an irate man agitated over rising prices walked up to India's agriculture minister Sharad Pawar, and slapped him, an assault captured on live television. At 9.73%, the inflation rate is reaching the politically significant double digits that can spell trouble for governments. Prices of essential commodities, including staple foods, have been rising just as the rupee has been falling, making imports dearer.

The slap was coincidental, but the ruling United Progressive Alliance (UPA) sprang into action, and later in the week it permitted foreign investors a majority stake in India's retail sector. One effect, the government hopes, will be more efficient distribution and less wastage, leading to reduced prices for consumers. That may happen if everything goes to plan. But leaving nothing to chance, the opposition – left and right – protested. Two chief ministers – from Tamil Nadu and Uttar Pradesh – said they wouldn't allow foreign-owned retail superstores in their states. Uma Bharti, a Hindu nationalist politician, has threatened to burn the first supermarket she finds.

The government remains, for the moment, committed to the step.The commerce ministry claims 10m jobs will in fact be created, 60% of them in logistics, and several officials say the decision will jumpstart India's stalled economic reforms.

That it does. Investors have been lukewarm about India's commitment to reforms, given the lacklustre enthusiasm for liberalisation within the ruling coalition in recent years. The UPA rode to power arguing that reforms (which it had initiated in 1991) were not benefiting the poor. Instead of hastening reforms to deepen their reach to include the poor, the government slowed the pace, and, at times, reversed the direction. Opening the retail sector, the government hopes, will revive interest in India.

Critics of the retail policy make five points. One, India doesn't need foreign retailers, since homegrown companies and traditional markets are doing the job well. Two, independent stores will close, leading to job losses. Three, profits will go to foreigners. Four, there will be sterile homogeneity and Indian cities will look like cities anywhere else. And five, the government hasn't built consensus.

None of the objections has merit. India's retail sector of $28bn is expected to grow by a factor of nine within a decade. Domestic demand is rising, and it is simply not possible for India's archaic retail sector to meet that demand. Inbuilt inefficiencies and wastage in distribution and storage account for why, according to some estimates, as much as 40% of food production doesn't reach consumers. Fifty million children in India are malnourished. Food often rots in antiquated state-run warehouses, or in transit. Profit-driven, cost-conscious companies will avoid waste and loss, the government hopes.

While some retail stores may have to close, and some jobs may be lost, superstores will need workers. Some 70% of Indians claim to be farmers, but one of the country's worst-kept secrets is the extent of disguised unemployment in Indian agriculture. Many farmers work in the countryside on small, unproductive tracts, earning minimal income, and are heavily in debt. Organised retail will absorb some of this labour force in better-paying jobs. It is common to see small shops employ workers without proper contracts, making them work long hours, not permitting them to join unions. Many shops depend on child labour. A well-regulated retail sector will presumably curtail some of these abuses. More important, the cheaper prices can only be good in a country where the public distribution network doesn't work properly, and 40% of the people are poor.

There is organised retail in India. Besides new, swanky malls, the country has its Indian-owned super bazaars and supermarkets. Some critics say India doesn't need foreign companies. But that can apply to almost every other sector in the country. From its independence in 1947 until 1991, India attempted to be semi-self-sufficient, during which its economy grew at an abysmally low rate, making no difference to the level of poverty.

Many Indian consumers resent the critics. They find nothing romantic about their hard lives and in these modern conveniences they see signs of development.

To be sure, there is one risk: that the foreign-owned retail companies may find Indian consumers more discerning than others, as some major brands have discovered. The Indian marketplace is littered with examples of well-known brands failing. Should the consumers remain loyal to their cornerstores and should the big box retailers fail, the government will have to resist the politically convenient temptation of bailing out the failures by offering them subsidiaries at taxpayers' expense.

But consumers will gain. Large superstores are inflation-busters. As Charles Fishman shows in his book, The Wal-Mart Effect, big stores squeeze costs and pass gains to consumers because of competition, and they contributed to the sustained low inflation in the US. Modern supermarkets can help tame inflation in India. They may also create jobs, prevent waste and improve logistics. Why would anyone oppose them?